ANNUAL REPORT 2011 - Connacher Oil and Gas

AR 2011
PG 61
8.1 Petroleum and natural gas properties
As a part of the company’s program to rationalize its conventional petroleum and natural gas properties, on November 15, 2010, the company’s
management committed to a plan to sell its conventional petroleum and natural gas properties located in Northern Alberta and Southwest
Saskatchewan. Accordingly, the carrying amount of the assets and liabilities relating to these properties was classified as held for sale on December
31, 2010. The sale of these properties was completed in 2011 for the net proceeds of $78.3 million resulting in a gain of $28.4 million.
Assets classified as held for sale are not depleted, depreciated or amortized.
8.2 Investment in associate
The following table shows the changes in the balance of investment in associate:
For the year ended December 31
2011 2010
(Canadian dollar in thousands)
Balance, beginning of year $ – $ 48,240
Effects of transactions recorded in net earnings (loss)
Share of loss – (1,999)
Dilution loss – (3,832)
Accumulated impairment – (9,763)
– (15,594)
Share of other comprehensive loss before tax – (4,963)
Balance, end of year, classified as held for sale $ – $ 27,683
As at December 31, 2010, Connacher owned 26.9 million common shares, representing 18.5 percent, of Petrolifera Petroleum Limited’s (“Petrolifera”)
issued and outstanding common shares and 6.8 million Petrolifera share purchase warrants. Petrolifera’s common shares and common share
purchase warrants were listed on Toronto Stock Exchange. Petrolifera was engaged in petroleum and natural gas exploration, development and
production facilities in South America. The investment in common shares was recorded as an investment in associate and the investment in share
purchase warrants was recorded as the derivative financial asset held for trading and recorded at fair value.
In April 2010, Petrolifera closed a public offering of 23,678,500 common shares at a price of $0.85 per common share for gross proceeds of
$20.1 million (the “Offering”). Connacher did not subscribe for shares in the Offering and accordingly, Connacher’s equity interest in Petrolifera
was reduced to 18.5 percent from 22 percent. The reduction in the ownership interest resulted in a dilution loss of $3.8 million in the year ended
December 31, 2010. In addition, $422,000 was transferred from other comprehensive loss to net earnings (loss) representing share of other
comprehensive loss of Petrolifera.
The assets relating to the associate were classified as an asset held for sale on December 31, 2010, following management’s commitment to support
the sale of all of the issued and outstanding common shares of Petrolifera to Gran Tierra Energy Inc. (“Gran Tierra Energy”). Gran Tierra Energy
entered into a Plan of Arrangement (the “Arrangement”) with Petrolifera on January 17, 2011, pursuant to which Gran Tierra Energy acquired all of the
issued and outstanding common shares and common share purchase warrants of Petrolifera.
Equity accounting ceased on December 31, 2010 upon reclassification as an asset held for sale. An impairment loss of $9.8 million on the
remeasurement of the investment in Petrolifera to the lower of its carrying amount and its fair value less costs to sell was recognized in 2010.
Upon the completion of a share exchange under the Arrangement in March 2011, the company received 3.3 million common shares and 841,000
common share purchase warrants of Gran Tierra Energy (see note 21). Connacher de-recognized the investment in Petrolifera in March 2011 and
recorded a loss of $6.8 million, including a $4.5 million transfer from other comprehensive income (loss).
In consideration for the assistance provided by the company in 2005 to Petrolifera in securing two Peruvian licenses for exploratory lands and for
the provision of financial guarantees respecting Petrolifera’s annual work commitments on the two licensed blocks, Connacher was awarded a 10
percent carried working interest (“CWI”) through the drilling of the first well on each block. Petrolifera had the right of first purchase of this CWI should
Connacher elect to sell it at some future date. The CWI is convertible at Connacher’s election into a two percent gross overriding royalty on each
license, after the drilling of the first well on each block. In 2011, Connacher was fully released from the provision of financial guarantees. Also, in
2011, Petrolifera relinquished its interest in one of the two Peruvian licenses. The company continues to own the CWI relating to the remaining license
and related rights after the completion of the transaction under the Arrangement.